Trading in pollution is a dirty game
By Chow Wei-Cheng
In the recent debate on tradeable emissions in Green Left Weekly, Clive Hamilton from the Australia Institute argued that such schemes can contribute to reducing greenhouse gas emissions in NSW. This scheme will have no such effect.
The arguments presented not only suffer from a lack of empirical and practical consistency, but also critically relies on market mechanisms to create a solution. This only serves to let Liberal and NSW state Labor governments off the environmental hook.
The traditional "regulatory approach" identified that the market was failing to address environmental problems and sought to tax polluting business to find the "optimal" level of pollution. This went some way in addressing the issue. However this approach suffered from a fundamental faith in market economics; it assumed that a little tinkering could ameliorate a problem that is fundamental to the capitalist system.
The new and "radical" tradeable permit scheme more fully embraces market mechanisms. Far from any notions of market failure, the underlying theory assumes that the extension of market mechanisms into the environment, by pricing it in permit form and creating a market for pollution permits (and so the environment), will create a more efficient environmentally sustainable outcome. As such, this scheme represents a shift to the right in the debate.
To briefly summarise Hamiltons argument: total greenhouse emissions are limited by issuing a number of permits; entitlements are traded and therefore valuable; the cost is a business cost adding to final prices; distributors thus choose less polluting sources as they are less costly; a lower (optimal) level of pollution is reached; competition will provide incentive to producers to cut costs and so reduce emissions; and successful competitors can sell excess permits for profit.
There are severe shortcomings in this argument. First, it assumes a degree of competition that does not exist in the electricity industry. The industry is a natural monopoly. Although the current moves to privatise and deregulate it will increase competition, it does so at a great social and environmental cost. Workers will be laid off and the duplicity of facilities will only waste more resources. Permits give credence to the pro-privatisation debate.
Secondly, to reduce pollution, the costs associated with permits must constitute a cut in profits. But demand for electricity is inelastic due to monopolies and because the product is a necessity. This means that demand is relatively unresponsive to price changes; a small increase in electricity prices does not greatly reduce electricity consumption. This means that firms can easily pass their costs onto consumers leaving their profit margins intact.
Thirdly, to eradicate pollution by providing firms with incentives to use better technology, the permit cost would have to be high enough to not just reduce profits but significantly slash them or send the firm bankrupt such that it will completely overhaul existing production processes to be more profitable. Coward governments will obviously not intervene in corporate affairs to this extent. So as long as it is still profitable to pollute, firms will do so.
Hamilton proposes two versions of tradeable emissions; one where the permits are issued for free according to the current levels of emissions, and the other where there is a cost associated with the permits. Hamilton argues in favour of the former due to its lower economic cost, greater flexibility and less impact on the consumer.
However, under the no-cost scenario there is no monetary incentive to change behaviour. The main incentive for companies to reduce pollution is the supposed profit from the sale of unused permits by switching to less polluting processes. Will the profits from surplus permit sales be sufficient to cover the cost of converting to new productive processes? In reality, even in a highly competitive market, capital expenditure costs are enormous compared to the potential profit from selling permits.
Issuing permits, particularly for free, makes no political statement about who is responsible and who should bear the costs of environmental destruction. It feeds the illusion that the laissez faire market can solve problems.
What then stops the government from extending this argument to scapegoat consumers for environmental problems (using the user-pays argument) and even issuing them with tradeable permits? These permits would certainly not be free and would represent a further cut in living standards. The Sydney airport noise levy is a step in this direction.
"Optimal" pollution?
Underlying all market mechanism arguments is the notion of an "optimal" level of pollution. Trading in permits implies that a firm that wants to pollute — presumably because it is cheaper — can buy permits from a less polluting firm. Total pollution stays the same.
Can we really be assured that this level of pollution has no adverse effect on the delicate global ecological balance? Is there an optimal amount of environmental destruction? An optimal amount of nuclear waste? An optimal amount of sunburn? Or an optimal amount of death? An "optimal level" accepts the current production structures, incentives and technology as given. The environment movement should not. These structures should be changed and eradicating pollution will require a reorganisation of the decision-making structures of society to implement these changes to technology and production.
The central problem with tradeable emissions is that it leaves the solution to the government, industry and the market — the creators of the problem. It is a technocratic solution that takes power and responsibility out of the hands of the environment movement and places it with the government and market. It lets governments appear to be adopting a "radical" program while in reality doing nothing about the effects of industrial pollution on the environment. Moreover, as Hamilton points out, it is consistent with the push to privatise and deregulate the electricity industry.
Environmentalists must look beyond market mechanisms for environmental sustainability. The only way for providers of essential services, such as electricity, to be made accountable and environmentally sustainable is if they are placed under social control. Only in this way, outside the market, can we collectively determine what, how and how much should be produced.